Research July 2012 REVIEW AND COMMENTARY ON HONG KONG'S PROPERTY MARKET Knight Frank 萊坊 Office Office sales and leasing markets quieten Residential Luxury home sales remain sluggish Retail Investors shift to non-core shopping malls 1
July 2012 Market in brief The following table and figures present a selection of key trends in Hong Kong s economy and property markets. Table 1 Economic indicators and forecasts Economic indicator Period Latest reading 2010 2011 2012 forecast GDP growth Q1 2012 +0.4%# +6.8% +5.0%# +3.8% Inflation rate May 2012 +4.3% +2.4% +5.3% +3.4% Unemployment Three months to May 2011 3.2%# 4.4% 3.4% 3.4% Prime lending rate Current 5.00 5.25% 5.0%* 5.0%* 5.0%* Source: EIU CountryData / Census & Statistics Department / Knight Frank # Provisional * HSBC prime lending rate Figure 1 Grade-A office prices and rents Jan 2007 = 100 230 210 190 170 150 130 110 90 70 50 2007 2008 2009 2010 2011 2012 Figure 2 Luxury residential prices and rents Jan 2007 = 100 190 170 150 130 110 90 70 50 2007 2008 2009 2010 2011 2012 Figure 3 Retail property prices and rents Jan 2007 = 100 300 250 200 150 100 50 2007 2008 2009 2010 2011 2012 index Rental index index Rental index index Rental index Source: Rating and Valuation Department / Knight Frank 2 2
Monthly review The property market has been clouded by local and external uncertainty, including the continuation of the global financial crisis, slowing growth in the Chinese economy and domestic policy risks associated with the change in Chief Executive to Leung Chun-ying. Hong Kong s office and residential markets were both sluggish in June, while the retail property sector continued to outperform, despite slower growth in retail sales figures. Prime Office The office sales market quietened in June, with about 250 deals being concluded a month-on-month drop of over 15%. However, total consideration soared, due to a number of notable transactions including four floors of Kowloon Commerce Centre in Kwai Chung, which reportedly sold for about HK$760 million or HK$7,280 per sq ft. Momentum in the office leasing market also weakened in June, particularly in Central, owing to a decrease in demand from the financial sector. Transactions in Central in the past month mainly involved small floor plates. For example, Pine River Capital Management leased a 5,700-sq-ft space in Two IFC for HK$130 per sq ft. By comparison, non-core business districts saw more activity last month. In Wan Chai, for instance, a 1,600-sq-ft unit on the 43rd floor of Central Plaza was renewed for HK$50 per sq ft per month, while Starbucks expanded its space in Sun Hung Kai Centre by leasing the 15,000-sq-ft 12Ath floor. In Kwun Tong, Adidas renewed its lease on 18-19th floors in Two Landmark East. Grade-A office rents in Central fell a further 2.3%, month on month, while other districts saw stable or slight increments in rents. Quarry Bay led the market with a 6.8% rental gain, followed by Hung Hom and Admiralty where rents rose 3.0% and 2.7%, respectively. North Point and Causeway Bay both recorded rent growth of around 2%. Looking ahead, some major leasing transactions are expected to be concluded in the coming months, as concrete offers have been made on a number of office premises. Leasing activity will continue to mainly involve relocations and renewals and non-core districts will continue to outperform in terms of both activity and rent levels. With the external environment remaining uncertain, we maintain our previous forecast that Grade-A office rents in Central will drop about 10 15% over 2012. Rents in non-core districts are expected to remain resilient. Residential Sentiment in the residential market remained sluggish in June before the new government cabinet took office, with market participants taking a A number of major office leasing transactions are expected to be concluded in the coming months, as concrete offers have been made on certain office premises. Luxury residential rents dropped 1.2% in June despite the market s entrance into the peak season. KnightFrank.com.hk 3
July 2012 wait-and-see attitude. Combined with the worsening global economy, there were only 5,886 residential sales in June according to the Land Registry. This represents a drop of 29.5% month on month and 34.9% year on year. Sales of luxury homes valued at HK$10 million or above also fell 27.7% month on month or 42.8% year on year, to 522. The number of primary sales dropped 24.3% to 827 in June, given the lack of major new launches. However, a number of new developments received satisfactory sales results. For example, Heya Green in Sham Shui Po, which was developed by the Hong Kong Housing Society, reportedly sold its entire first batch of 320 flats. Meanwhile, The Riverside in Tai Wai reportedly sold over 70% of available flats on the first day of launch, according to the developer. The secondary market was sluggish, due to uncertainity in the market. Some potential buyers had expected home prices to fall after policies were introduced by the new government. Meanwhile, most homeowners enjoyed low mortgage rates and were therefore reluctant to sell at reduced prices. The widening gap between bidding and asking prices resulted in a 30% drop in the number of secondary sales, to 5,059. s, however, remained resilient. Luxury and mass residential prices both rose over 1% last month. The luxury market even reported a number of record-breaking sales transactions. For example, a 9,254-sq-ft house in Villa Bel-Air in Pokfulam sold for HK$310 million or HK$33,499 per sq ft the highest-ever price in the development. A 1,422-sq-ft unit in the Harbourside in Tsim Sha Tsui, meanwhile, sold for HK$53 million or HK$37,271 per sq ft the highest non-duplex price ever recorded in the development. The leasing market showed little improvement, with weak demand from corporate tenants, despite the onset of the traditional summer peak season. Multinational companies were conservative on bidding rents, due to uncertainty in the local and global economy. Luxury home rents fell by an average of 1.2% month on month. Looking ahead, we expect residential sales to rebound in July, as the new government has promised to avoid vigorous measures to regulate home prices. Meanwhile, central banks in Europe and China lowered interest rates in June, thereby promoting liquidity. However, the risk of slow economic growth in China and across the globe persists and the local luxury-home leasing market is set to remain weak. We believe home prices and rents will both fall during the remainder of the year, but at modest rates. Retail The adverse external environment continued to weigh on consumer sentiment in Hong Kong. Retail sales growth notably eased to 8.8% in May, the smallest gain since September 2009, disregarding January and February due to seasonal distortions during the Chinese New Year holidays. Despite the slowdown in retail sales, global retailers remained keen to expand in Hong Kong amid sluggish performance in Europe and the US. Coupled with limited availability, retail rents in prime locations edged up another 2% quarter on quarter in the second quarter. Meanwhile, second-tier streets continued to benefit from relocation and expansion demand from mid-end retailers. Mainland fashion brand Canudilo, for example, reportedly pre-leased two shops totaling 4,000 sq ft in Hankou Road, Tsim Sha Tsui, for a monthly rent of about HK$1 million doubling that of the previous lease. Amid skyrocketing prices for prime retail space, investment interest turned to shopping malls in non-core areas, given their competitive prices and yields. Laguna Plaza in Kwun Tong owned by Hang Lung Properties (0101.HK) was reportedly sold to an investment fund for HK$1.5 billion, representing a yield of about 4%. Meanwhile, Mongkok Computer Centre changed hands for HK$1.018 billion or approximately HK$38,000 per sq ft, representing a yield of about 4.4%. Finally, Wheelock Properties (0020.HK) sold Bellagio Mall, the shopping arcade in its Sham Tseng residential project, for HK$280 million. About 98% of the 450,000-sq-ft retail space in Hysan Place in Causeway Bay has been pre-leased and full occupancy is expected when it opens next month. Major tenants include T Galleria owned by DFS and Eslite Bookstore, which will occupy about 45,000 sq ft and 41,000 sq ft, respectively. Rents in the mall average HK$150 per sq ft. Inbound tourism remained strong, despite an uncertain economic outlook. In the first five months of 2012, visitor arrivals increased 4.8% year on year. The number of Mainland tourists, which accounts for 69.9% of total arrivals, rose 21.3%. The continual growth of tourism and retailers expansion needs should render support to the retail property market. Prime retail rents are set to remain stable or rise marginally in the second half of 2012, having risen over 5% in the first half of the year. Prime retail rents are expected to remain stable or rise marginally in the second half of 2012, having risen over 5% in the first half of the year. 4
Prime office Table 2 Selected office sales transactions Despite a 15% month-on-month drop in office sales volume, total consideration soared due to the conclusion of a number of notable deals. District Building Floor / unit Area (sq ft) (HK$M) (HK$psf) Central Wings Building 21 st floor 3,393 $50.89 $14,999 Sheung Wan Wan Chai Shun Tak Centre East Wing The Sun s Group Centre 9 th floor / unit 15 1,057 $15.85 $14,995 16 th floor 7,388 $99.74 $13,500 Wan Chai AXA Centre 13 th floor 14,500 $188 $12,966 Kwai Chung Kowloon Commerce Centre 4 floors 104,400 $760 $7,280 Source: Economic Property Research Centre / Knight Frank Non-core business districts saw more office leasing activity than the CBD in June. Table 3 Selected office leasing transactions District Central Building International Financial Centre Two Tower / floor / unit Part of 8 th floor Area (sq ft) Tenant 5,700 An investment fund Kowloon Bay Enterprise Square Three Mid floor unit 8,930 N/A Sheung Wan Infinitus Plaza 19 th & 35 th floors 23,000 Hoi Tung Securities Kowloon Bay Skyline Tower Two mid floors 50,000 N/A Tsim Sha Tsui International Commercial Centre 69 th floor 25,000 N/A KnightFrank.com.hk 5
July 2012 Rents in non-core locations are expected to outperform those in core business districts this year. Table 4 Month-on-month movement of Grade-A office rents (Jun 2012) Central / Admiralty Wan Chai / Causeway Bay Quarry Bay Tsim Sha Tsui Kowloon East In Central, Grade-A office rents underperformed in June compare with other districts. Table 5 Prime office market indicators (Jun 2012) District Net effective rent HK$psf/ mth Change Change May 12 Mar 12 Jun 11 HK$psf May 12 Mar 12 Jun 11 Premium Central 140.7-2.5% -7.1% -22.1% n/a n/a n/a n/a Traditional Central 108.9-2.2% -3.8% -20.9% 25,484 2.4% 6.1% 3.3% Admiralty 84.1 2.7% 2.1% -7.9% 19,372 1.6% 4.4% 2.5% Sheung Wan 60.8 0.0% -0.2% -1.1% 17,538 3.7% 9.8% 5.0% Wan Chai 63.3-1.1% -2.7% -0.9% 15,437 3.9% 13.4% 9.1% Causeway Bay 66.8 1.9% 2.3% 7.9% 15,029 4.3% 10.7% 1.3% North Point 36.9 1.8% -0.1% 3.9% n/a n/a n/a n/a Quarry Bay 51.6 6.8% 4.4% 7.0% n/a n/a n/a n/a Tsim Sha Tsui 49.7 0.2% 1.8% 8.9% 11,365 4.6% 7.8% 1.6% Cheung Sha Wan 22.3 0.0% 0.0% 6.4% n/a n/a n/a n/a Hung Hom 32.5 3.0% 6.2% 17.4% n/a n/a n/a n/a Kowloon East 33.9 0.3% 0.6% 11.6% n/a n/a n/a n/a Mong Kok / Yau Ma Tei 48.0 0.0% 0.0% -2.1% n/a n/a n/a n/a Rents and prices are subject to revision. 6
Residential A number of luxury homes were sold at over HK$32,000 per sq ft in Tsim Sha Tsui and Mid-Levels. Table 6 Selected residential sales transactions District Tsim Sha Tsui Mid-levels Building The Masterpiece Serenade Tower / Floor / unit 66-67 th floors / duplex unit E Tower 2 / 68 th floor / unit A Area (sq ft) (HK$M) (HK$psf) 3,333 $124.588 $37,380 3,778 $140 $37,057 Mid-levels The Albany Block A / 25 th floor 2,549 $88 $34,523 Mid-levels Kennedy Park at Central 20 th floor / unit A 2,478 $84.995 $34,300 Tsim Sha Tsui The Arch Moon Tower / 79 th floor / unit A 1,665 $53.8 $32,312 Source: Economic Property Research Centre A number of major leasing transactions were recorded on the Peak and in Mid-Levels, involving rents of over HK$60 per sq ft, per month. Table 7 Selected residential leasing transactions District The Peak Building The Mount Austin Tower / Floor / unit Block 1 / high floor / unit B Area (sq ft) Monthly Rent (HK$) Monthly Rent (HK$psf) 1,847 $125,000 $67.7 The Peak Kellet House House 3,880 $250,000 $64.4 Mid-levels Branksome Crest High floor / unit A 2,369 $145,000 $61.2 Island South Belgravia High floor / unit B 2,790 $158,000 $56.6 Island South The Lily Tower 3 / low floor 3,533 $189,900 $53.8 KnightFrank.com.hk 7
July 2012 Residential rents fell in four of the five major luxury residential districts on Hong Kong Island. Table 8 Month-on-month movement of luxury residential rents (Jun 2012) Peak Island South Mid-Levels Jardine s Lookout / Happy Valley Pokfulam Luxury residential prices grew 1.3% in June, while rents dropped 1.2%. Table 9 Luxury residential market indicators (Jun 2012) District Net effective rent HK$psf/ mth Change Change May 12 Mar 12 Jun 11 HK$psf May 12 Mar 12 Jun 11 The Peak $59.9-3.1% -1.4% -8.4% $23,667 0.0% 0.0% -2.4% Mid-Levels $42.9-0.6% -6.7% -16.9% $20,586 2.2% 4.1% 1.0% Pokfulam $30.5-0.9% -1.8% -10.0% $18,112 2.8% 5.8% 1.8% Jardine s Lookout & Happy Valley Island South $40.9 0.6% 0.9% -4.8% $18,389 1.4% 4.0% -1.4% $43.8-1.2% -4.8% -12.7% $24,646 1.4% 6.7% 2.6% Rents and prices are subject to revision. 8
Retail Investment interest in retail properties remained strong, with a number of major sales transactions being recorded last month. Table 10 Selected retail sales transactions District Building Floor / unit Wan Chai Tsim Sha Tsui Perfect Commercial Building Peninsula Centre unit F units 2-3 Area (sq ft) (HK$M) (HK$psf) 133 $14.65 $110,150 620 $60 $96,774 Causeway Bay Causeway Bay Commercial Building unit B 855 $75 $87,719 Tuen Mun Dorboa Building unit 38 94 $7.5 $79,787 Kwun Tong Kwun Tong Plaza 1 st floor / unit 22 255 $19.89 $78,000 Source: Economic Property Research Centre The limited availability of prime retail space resulted in higher rent levels. A ground-floor unit in Po Ming Building, Causeway Bay, was leased at over HK$900 per sq ft, per month. Table 11 Selected retail leasing transactions District Building Floor / unit Causeway Bay Mong Kok Causeway Bay Wan Chai Po Ming Building Sun Hing Building Empire Court Lap Tak Building unit L unit 5 unit 8 unit 2B Area (sq ft) Monthly Rent (HK$) Monthly Rent (HK$psf) 300 $280,000 $933.3 490 $350,000 $714.3 845 $310,000 $366.9 236 $83,000 $351.7 Sha Tin Sha Tin Plaza Shopping Arcade 3 rd floor / unit 40 332 $113,825 $342.9 Source: Economic Property Research Centre KnightFrank.com.hk 9
July 2012 In June 2012, all major retail districts saw rent growth, month on month. Table 12 Month-on-month movement of prime street shop rents (Jun 2012) Central Causeway Bay Tsim Sha Tsui Mong Kok Retail sales grew at a moderate pace in May. Consumer durable goods recorded the largest year-on-year gain of 24.3%. Table 13 Retail sales by outlet type (May 2012) Value Share of total Change Outlet HK$ billion % Jewellery, watches and clocks, and valuable gifts Apr 12 Feb 12 May 11 $7.9 21.8% 1.0% 6.7% 3.1% Clothing, footwear and allied products $4.5 12.6% -4.3% 2.6% 5.0% Department stores $3.7 10.3% 18.3% 20.4% 8.8% Fuels $0.9 2.5% 8.4% 17.2% 3.6% Food, alcoholic drinks and tobacco (excluding supermarkets) $2.7 7.4% -0.2% -2.6% 2.5% Consumer durable goods $6.5 18.1% 5.6% 11.9% 24.3% Supermarkets $3.8 10.6% 8.0% 14.8% 12.2% Others $6.0 16.8% -12.0% -3.9% 6.6% All retail outlets $36.0 100.0% 0.9% 6.6% 8.8% Source: Census and Statistics Department 10
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